Taxes are a fact of life, affecting all of us every day in some way or another. They are the way our layers of government obtain money for their undertakings, whether those are undertakings you agree with or not. That includes everything from national defense to the retiree down the street drawing Social Security, from national parks to your local library.

But taxes are also the government’s way of encouraging or incentivizing people to do what the government wants them to do.

Last time we talked about the tax savings differential between a HDHP+HSA vs a traditional health care plan + HCFSA. That’s the federal government incentivizing people to take more personal responsibility for their health care. Other examples are the tax credits for buying new electric or hybrid vehicles and solar panels; both of those tax credits then have phase-out stages once the government figures its given those industries and our environmental impacts the boosts it wanted to give them. Income taxes on employee wages are higher than income taxes on investments, as government feels it doesn’t need to incentivize people to be employees, and instead wants to incentivize people to save enough money to then invest into businesses in the form of stocks and bonds. The government incentivizes people to become economic engines of the community aka business owners, by granting businesses depreciation and other tax breaks for the costs of doing business (but then recaptures many of them when the business closes its doors).

In recent history, it seems like almost every year there are some tax provisions set to expire, that the legislature may resuscitate and extend right before the end of the calendar year (or even after, and put into place retro-actively). But major tax reform has only happened approximately every 30 years, when there have been enough shifts in governmental power or situation to drive major changes. Besides the end of year 2017 Tax Cuts and Jobs Act (TCJA), there was major tax reform in the 1980’s, and the 1940’s with attempts to wrap up the Great Depression Federal income taxes hadn’t even been instituted until 1862, to pay for Civil War costs, and at the time that was only a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000. Quite the change from today, huh? The only constant with taxes has been that they will change. With all of this history behind it, taxes are not a simple thing. My own tax instructor described the tax code as being as thick as 10 Bibles, and we all know how much argument there is over just one religious text; note that this description was BEFORE the TCJA was enacted, our tax code certainly isn’t any shorter now.

Some tax measures aren’t adjusted for inflation. An example of this includes the $5000 dependent care flexible spending account (DCFSA) that was implemented in the 1980’s. As the parent of young kids, boy do I wish that was inflation adjusted, because if so it’d be worth more than $11k tax-free today. Another example is the sale of primary residence exclusion from capital gains taxation. When our grandparents bought their forever house, for most families the idea of $250k or $500k of gains in basis was outlandish; now due to inflation of home costs without inflation of the threshold, that’s not at all outlandish especially if you own the house for 30+ years. AMT didn’t used to be inflation-adjusted, unintentionally capturing more and more members of the middle class each year. Other commonly of interest examples without inflation adjustments include the Child Tax Credit and the American Opportunity Tax Credit.

Other tax measures (including the Social Security wage base, Social Security benefits, and retirement plan contribution limits such as IRAs and 401ks) are inflation-adjusted. Inflation isn’t a single measure. There are all sorts of measures of inflation indices. The Social Security COLA (cost of living adjustment) inflation factor uses the CPI-W, but there has been repeated discussion about switching to a chained CPI; ignoring the technical details of the “consumer price index” and how many different variations there are, switching from an unchained to a chained measure means that means that Social Security recipients would see their checks grow more slowly than they had been, as they would then be tied to a smaller inflation adjustment. Similarly, with the TCJA the income thresholds, deduction amounts, and credit values will all be tied to the C-CPI (aka chained CPI) instead of the CPI. So not all inflation adjustments are created equal, and they won’t necessarily actually keep up with the levels of inflation you are subject to.

In addition to income taxes, which have been most of the focus of above, we have payroll taxes, business taxes, estate taxes, inheritance taxes, sales taxes, self-employment taxes, real property taxes, registration taxes, and excise taxes such as on gasoline.

Is your head spinning yet?

Teaching my personal income tax students, this was a drawing I would show them on their first day of class:

Because at the start of that first day, the students all felt pretty well informed and confident that they knew what they were doing – after all, they were the few crazy souls who knew enough to be interested in taking on tax preparation. And sure enough, by the end of day 4, my students had emotionally wilted and were crashed back down on the confidence axis. At which point it was my turn to cheer them all on, because with persistence their knowledge levels improved, as did their confidence levels.

So take heart, taxes are a huge subject. Start learning one little bite at a time, in whatever piece you’re most interested in. We will mostly focus on income taxes here, as that’s the one that affects the most people regularly. Plus in personal income taxes there are incentives you can choose to utilize (or not) as best fits your situation, so lots of levers to mix and match.